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Dallas hotelier who returned $69 million in PPP loans now under SEC investigation

The probe into related-party transactions could result in significant civil or criminal penalties for the hotel companies, already battered by the shutdowns and drop in travel.

Updated at 7:40 p.m.: Adds statement from Bennett.

Three Dallas-based hotel companies run by hotelier Monty Bennett received a subpoena from U.S. securities regulators for records involving related-party transactions.

The Securities and Exchange Commission investigation comes shortly after Bennett’s hotels returned at least $69 million in COVID-19 relief funds received under the Paycheck Protection Program. Bennett agreed to return the money after intense public scrutiny about large companies dipping into the pool forced the U.S. Small Business Administration to rewrite the rules.

In a regulatory filing Monday, Bennett revealed that his trio of publicly traded companies, including Ashford Inc., Ashford Hospitality Trust and Braemar Hotels and Resorts, received a subpoena in June to produce documents starting from Jan. 1, 2018. The requested documents included the companies’ accounting practices and controls.

Ashford Hospitality Trust said in the filing that it’s responding to the SEC request and can’t predict the timing or outcome of the investigation. The company said it could result in significant legal expenses and divert its management’s attention from running the 117 hotels in its trust, including The Ashton in Fort Worth and Lakeway Resort and Spa near Austin.

“If the SEC were to determine that legal violations occurred, we could be required to pay significant civil and/or criminal penalties ... we can provide no assurances as to the outcome of the SEC investigation,” the company wrote in the filing.

In a statement, Bennett said that Ashford has received little attention from the SEC during its 16 years as a public company, and he hopes the sudden scrutiny isn’t due to his support of President Donald Trump. Bennett has contributed $1.1 million to Republican Party candidates since 2015, according to U.S. Federal Election Commission data.

“We are confident that the SEC will discover we have acted properly in all regards, and we hope this inquiry is not the result of the public reporting of my support for our President.”

James Lundy, a Chicago regulatory investigations lawyer who previously worked for the SEC, said there’s nothing inherently wrong with related-party transactions. Instead, he said, it’s how those transactions are disclosed and handled from an accounting perspective.

“Related-business transactions receive more scrutiny because there’s the conflict-of-interest concern,” he said. “They’re concerned transactions will lead to benefits for the parties involved at the detriment of shareholders or investors.”

Investigations can take one to two years, Lundy said.

The SEC is interested in Lismore Capital, a subsidiary of Ashford Inc. founded in 2018 to provide debt placement services to the two real estate investment trusts, which pay a fee to be advised by Ashford Inc. Lismore, which acts as an independent contractor, is paid an advisory fee and was asked in March to renegotiate existing mortgage debt for the two REITs.

Earlier this year, Bennett said Ashford had stopped making payments on most of its $4 billion in debt, including nearly all of its mortgage and mezzanine loans. That angered some of its lenders.

In April, Ashford lender Brookfield Asset Management Inc. accused Bennett’s companies of fraudulent transfers, including moving money from its hotels to its parent company. Ontario, Canada-based Brookfield, which lost $157 million in the first quarter, said Ashford was helping insiders while not paying creditors, like itself.

Brookfield threatened to sue Ashford. Bennett responded to Brookfield in a filing and admitted to investors that one of Ashford’s subsidiaries distributed money before the pandemic. He emphasized that the transfer happened before COVID-19 threw the hotel industry into turmoil and that now there were more pressing matters, such as surviving.

“While most of our lenders are working with us on forbearance in good faith, it is unfortunate that Brookfield immediately hired lawyers and sent a demand letter to our board, in which they threatened our board members personally,” Bennett said in the filing. “... We believe that Brookfield’s threatened claims are without merit and come at a time when our hotel properties are struggling from the sudden and massive reduction in travel.”

Lundy said it’s not unusual for aggrieved parties to complain to the SEC, though there’s no way of knowing if that’s what happened in this case.

“The dispute is because Brookfield is concerned that a related party received priority over Brookfield,” he said. “So Brookfield probably has some documents that say it gets some priority for payments but that priority was given to a related party.”

Ashford Inc., which laid off 95% of its 7,000 employees at the beginning of the pandemic, reported a 28% year-over-year drop in revenue for the latest quarter ended June 30. Four of the company’s properties are still closed, while 112 are open and operating. Its two REITs saw a nearly 90% decline in revenue from June 2019.

Natalie Walters. Natalie covers companies and the economy for the Dallas Morning News. She previously reported for The Motley Fool, TheStreet, and Business Insider -- all in New York. She is currently in the investigative journalism master's program at the Walter Cronkite School of Journalism and Mass Communication at Arizona State University in Phoenix.

natalie.walters@dallasnews.com NatalieReporter Instagram IconNatalie Walters
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